What Is The Average Stock Market Return Rate?

The stock market can feel like a bit of a rollercoaster ride, with returns rising and falling over time. Investors cannot avoid the volatile nature of the stock market. But with a long-term outlook, focusing on the average return on stock market can pave the way for realistic expectations. Let’s explore the average stock market returns that might impact your long-term investment strategy.

Why Do People Invest In The Stock Market?

Historically, stocks offer investors greater potential returns on their investment than U.S. Treasury bonds and corporate-backed investment bonds. But the volatility of the stock market presents a greater short-term risk.

In the short-term, stock market returns are highly unpredictable. But the investment returns tend to even out for an investment portfolio with a long-term stake in the market. Investors building a portfolio over several decades are likely to see growth.

What Is The Average Rate Of Return On Stocks?

The stock market contains a wide array of individual stocks that you can use to build a portfolio. However, when talking about stock market returns on the whole, the S&P 500 is a commonly used choice for the market.

The S&P 500 is an index of 500 of America’s largest publicly traded companies. With that, it is a useful choice for measuring a broad swath of the market. On average, the S&P 500 has grown by an annual average of 10%. At this rate, investors can approximately double their money every seven years.

While a 10% average rate of return on stocks is enticing, it doesn’t highlight all of the peaks and valleys investors face along the way. Below is a closer look at some of the factors that impact true returns.

Stock Market Historical Returns

The historical average of 10% is a good benchmark for a long-term investment strategy. But market volatility leads to differing returns that can vary from decade to decade.

Here’s a sample breakdown of stock market returns over time, assuming you invested $100 at the beginning of the time period listed:

• 40 Years (1982 – 2022): 11.6% annual return
• 30 Years (1992 – 2022): 9.64% annual return
• 20 Years (2002 – 2022): 8.14% annual return
• 10 Years (2012 – 2022): 12.74% annual return

The economic events that push stock prices to rise and fall will have an impact on your average returns.

Inflation

Inflation eats into the buying power of your stock portfolio. When you take inflation into account, the actual returns for an investor are a bit lower than the dollar amount listed in your portfolio.

Over the last 60 years, the average annual inflation rate in the U.S. was 3.8%. Investors should consider this cut to their buying power when determining real returns.

For example, let’s say you invested $100 in 2012. Without considering inflation, your portfolio would have grown nominally to $374.11 by the end of 2022, which indicates a 12.74% return. When the average inflation rate over that 10-year period is included, the inflation-adjusted value of your portfolio would be $293.50.

Market Volatility

The average rate of return tied to the S&P 500 can swing wildly from year to year. For example, the S&P 500 fell by 36.55% in 2008 but grew by 32.15% in 2013. Big changes to returns on a year-to-year and decade-to-decade basis will have an impact on your actual returns.

When looking at the last 20 years, investors would have lost money by investing between 2007 and 2011. But investors saw an overperformance between 2012 and 2016.

Below is a look at average returns for the S&P 500 over the last 20 years, broken down into 5-year blocks, and how those numbers change when adjusted for inflation.

What Are The Best Ways To Invest In The Stock Market?

When it comes to investing in the stock market, regular volatility makes time an ally. With a long-term outlook and a diversified approach to investing, you can grow your portfolio over decades. As with any financial decision, we recommend talking to a financial advisor before making any changes to your investment strategy.

Use A Buy-And-Hold Strategy

Contrary to some of the flashy headlines, regularly making trades isn’t the usual path to success in the stock market. Instead, most investors will benefit from a buy-and-hold strategy.

Essentially, you’ll buy stocks to fill a diversified portfolio. The next part is simply waiting until your investment grows. While it sounds easy to keep your hands off, the volatility of the stock market can push investors to make trades based on emotions instead of numbers.

Many experts recommend individual investors stick to purchasing index funds, which track the performance of a particular index. For example, you can buy an index fund that tracks with the S&P 500.

If you are looking to keep up with the market, index funds combined with a buy and hold strategy might be the right fit.

Invest In Mutual Funds

A mutual fund pools your investment funds with other investors to provide diversification for everyone.

Instead of owning a single stock, you’ll own a little bit of a portfolio with lots of different stocks. This type of investment is overseen by a professional manager, who will track the market and make appropriate changes along the way.

If you are looking for a way to pass the baton to a professional, this can be a worthwhile option.

Invest In Your Retirement Accounts

The right investment account can help you supercharge your portfolio. Specifically, retirement accounts, like 401(k) plans, IRAs and Roth IRAs, come with tax advantages that can push your portfolio forward.

Here are a few reasons to prioritize investing through a retirement account:

• Employer contributions: if you have access to an employer-sponsored retirement plan, your employer might make matching contributions.
• Adjustments for growth: A retirement account is designed to help you grow your funds over the course of several decades.
• Tax benefits: Some accounts allow you to make pre-tax contributions, which means you can get more money in the market. When it’s time to make a withdrawal, you’ll pay income taxes on the pre-tax contributions.

Work With A Financial Advisor

If you want someone to guide you through the process of investing in the stock market, a financial advisor can help. The right financial advisor can help you look at your overall financial picture and make investment choices that reflect your goals.

The downside of working with a financial advisor is the cost. Consider interviewing several financial advisors before moving forward with one that suits your needs.

The Bottom Line

The average stock market returns are around 10%. But you should expect a significant amount of volatility along the way month to month and year to year. If you have a longer investment horizon, you will typically find this volatility to level out when looking at investments over a longer time period.

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